If you, like many economists, believe that the U.S. is headed for a recession this year, you may wonder when to sell cyclical stocks.
Cyclical stocks rise and fall with the economy. In good economic times, cyclical stocks perform better. And when things are tightening, it may be time to look for the best cyclical stocks to sell.
Inflation remains stubbornly high, leading the Federal Reserve to raise interest rates 10 times to bring the cost of goods down and slow down the overheated economy.
Then there’s the turmoil in Washington, as the Republican-led House of Representatives and the Democratic White House are headed for a showdown on the national debt ceiling.
Without a compromise, the U.S. could be facing default on its debt and be unable to pay its bills by early June.
Companies involved in construction, manufacturing, automotive, and consumer discretionary goods often have cyclical stocks. They are the first affected by less consumer spending, slower economic activity and less business investment.
Several of those make this list of cyclical stocks that get a low grade from the Portfolio Grader.
| CZR | Caesars Entertainment | $43.56 |
| TSLA | Tesla | $167.29 |
| RUTH | Hospitality | $21.39 |
| LUV | Southwest Airlines | $28.82 |
| TM | Toyota Motors | $143.41 |
| AAL | American Airlines | $14.18 |
| SIRI | Sirius XM | $3.38 |
Caesars Entertainment (CZR)
Caesars Entertainment (NASDAQ:CZR) stock is up 9% this year, which is great if you’ve been an investor in CZR stock. But when you look at what’s likely to happen in the next few weeks, CZR stock makes our list of cyclical stocks to sell.
A recession would be horrendous for entertainment companies like Ceasars. The first thing Americans would take out of their household budget would be discretionary spending.
With famous casinos like Ceasars Palace, Harrah’s and Bally’s, Ceasars is a well-known gaming and resort company that generated more than $10.8 billion in revenue last year. It had record-high earnings for its Las Vegas and regional segments in the first quarter of this year.
But keep an eye out on the company’s debt. It came in at $25.55 billion at the end of the first quarter, an increase from $12.6 billion at the end of 2021, thanks to its acquisition of Eldorado Resorts.
CZR stock has a “D” rating in the Portfolio Grader.
Tesla (TSLA)
Tesla (NASDAQ:TSLA) is the biggest of the electric vehicle stocks, with a market share of more than 60% in the EV space. And it’s also the biggest automotive company by market cap, with a valuation of $535 billion.
That’s a huge number, but it used to be a lot bigger. Tesla stock is down more than 40% over the last year as the company faces a lot of issues. These include an increased competition that squeezed profits, falling earnings per share, and CEO Elon Musk’s distraction with his ownership of Twitter.
Musk sold more than $22.9 billion in Tesla stock to finance his purchase and prop up Twitter, but putting that many shares back on the market helped push down the stock price.
What comes next? More of the same, but it hasn’t been great. Tesla missed analyst estimates in the first quarter for both earnings and revenue.
Analysts are downgrading Tesla stock, as the company acknowledged “ongoing cost reduction” would continue.
TSLA has a “D” rating in the Portfolio Grader.
Ruth’s Hospitality (RUTH)
As the owner of the high-end steakhouse chain Ruth’s Chris Steak House, Ruth’s Hospitality (NASDAQ:RUTH) relies on its customers’ discretionary income.
They need people to feel good enough about the economy to come in and drop $35 on a piece of meat and close to $100 for a full dinner.
Hey, I love a good steak as much as anyone. But if people can’t pay their bills and are worried that their investment portfolio may go up in smoke because of an economic meltdown, they won’t pay Ruth’s Chris prices, even for a great meal.
Interestingly, Darden Restaurants (NYSE:DRI), the owner of the Olive Garden fast-casual chain, announced it’s buying Ruth’s for $715 million in an all-cash deal.
Darden already owns the Longhorn Steakhouse chain. It’s paying $21.50 per share, which is already close to what RUTH stock is valued at now. So there’s no value to be had by taking a position.
RUTH stock gets a “D” rating in the Portfolio Grader.
Southwest Airlines (LUV)
When you think about air travel these days, one of the first things that would cross your mind is the reports of massive flight delays that struck airports several times over the last year.
Unfortunately for investors, Southwest Airlines (NASDAQ:LUV) seems to be the poster child for flight delays and the bad publicity that comes from them.
Passengers and shareholders are so rattled that a brief delay affects the stock price. In April, a vendor-supplied firewall malfunctioned and caused all departures to be delayed briefly. That single incident sent the stock price down 2%.
JP Morgan analysts downgraded LUV stock from “neutral” to “overweight” and cut the price target from $64 to $39, and I can’t blame them at all.
Even if you believe that the U.S. will avoid a recession and this will be a busy travel season, Southwest is having enough trouble maintaining its flights. I have little confidence they would manage the strain without another breakdown or two.
LUV stock is down 35% over the last year, and it gets a “D” in the Portfolio Grader.
Toyota Motors (TM)
Tesla has the biggest market capitalization, but Toyota Motors (NYSE:TM) is No. 2 globally in market share, with 13.7% of all vehicles sold last month, second only to General Motors (NYSE:GM).
Toyota also has three of the most popular models, with the RAV4, Camry and Tacoma all in the top 10.
After lagging other companies, Toyota is surging forward with its plans to electrify its automotive fleet. It plans to increase its investment in a planned battery plant in North Carolina from $1.29 billion to $3.8 billion.
Higher interest rates are significantly damaging automotive markers. TM stock is down 21% in the last 12 months, and the threat of a recession would be even worse for Toyota and its shareholders.
On the whole, Toyota is a fine automotive company. But for May 2023, it’s not a good investment. TM stock has a “D” rating in the Portfolio Grader.
American Airlines (AAL)
American Airlines (NASDAQ:AAL) doesn’t have the massive failures Southwest does, but it’s facing some problems of its own that’s making this cyclical stock unattractive.
Happily for American, its revenues are finally approaching the levels it achieved before the Covid-19 pandemic. The company’s not have the earnings performance it did in the so-called “before times” before the coronavirus.
I see one of two things happening in May and throughout the summer. On the one hand, congressional Republicans and President Biden don’t agree on the debt ceiling and the U.S. starts defaulting on debts. That’s the worst-case scenario that would hurt American and other stocks.
On the other hand, we avoid a national default, but the threat of a recession continues to hang over investors’ heads, but American also has to deal with the rising cost of jet fuel prices.
Either way, American looks like a bad investment this May. It has a “D” rating in the Portfolio Grader.
Sirius XM (SIRI)
I’m not impressed with Sirius XM (NASDAQ:SIRI), the entertainment company that sells satellite radio and online radio services. And neither is Wall Street.
The company is in cost-cutting mode, laying off 8% of the workforce, and issued guidance for 2023 for $9 billion in revenue that would roughly match what it did in 2022.
The problem for Sirius XM is that people aren’t buying cars as they used to. If they did, then Tesla and Toyota probably wouldn’t be on this list of cyclical stocks to avoid. Sirius XM’s products are typically used for automobiles – so if those sales suffer, Sirius doesn’t even have a chance to grow the business through auto sales.
SIRI stock is down 38% over the last 12 months. It has an “F” rating in the Portfolio Grader.
On the date of publication, Louis Navellier did not hold (either directly or indirectly) any positions in the securities mentioned in this article.